China’s new tax to boost Aussie companies

An electric car under scrutiny at the China Low-Carbon Transport and New Energy Vehicles Exhibition in Beijing this week. Transportation and logistics were two of the first industries to which the VAT reforms were applied.
AFR

by
Sally Rose

China is in the process of implementing major tax reforms which will result in Australian companies with exposure to Chinese taxes – whether through import, export or China-based operations – paying less tax.

“One of the big winners will be multinational companies, including of course Australian companies that do business in China," says Lachlan Wolfers, a KPMG tax partner who was seconded from Sydney to the firm’s Shanghai office nearly two years ago to help advise the Chinese government on its tax reform process.

“Most companies that trade services with China – import or export – will effectively have no VAT liability, whereas till now there has been a 5 per cent cost any time services were provided in the supply chain," Wolfers says. “China’s new policy makes it more consistent with Australia, which does not charge GST on exports."

Australian companies with manufacturing, wholesale or retail operations in China will also benefit. “Now they will be able to claim a VAT credit for any of the services that they purchase, whereas before they had to pay a 5 per cent business tax on them," he says.

Since new Chinese leadership took control in November, it has moved swiftly to accelerate the rollout of the VAT reforms – which will stop taxation at every step of the supply chain and replace it with a single tax to the final consumer – in a bid to modernise and develop the country’s services sector. Shanghai was the first city to implement the reforms, on January 1, 2012. It is now in place in 11 other major cities, including the capital Beijing. The reforms are expected to apply in all jurisdictions by the middle of the year.

Swift and staggered implementation

China has had a consumption tax on goods in place since 1994 but not on services; the introduction of the VAT will mean it will have a consumptive tax on both. Previously, a business tax was payable on every service transaction. The business tax rate was generally 5 per cent, with a discounted rate of 3 per cent applicable on construction, telecommunications and transportation. The exception has been the entertainment industry which has been subject to much higher rates of up to 20 per cent.

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A swift and staggered implementation combined with the far greater size of the national economy means the changes in China will be complex for corporate finance teams and their advisers to deal with.

Whereas Australia’s GST is calculated at a flat rate of 10 per cent, China is introducing a variable VAT rate of between 6 per cent and 17 per cent. The lowest rate of 6 per cent will apply to professional services and consulting firms; the highest rate of 17 per cent will apply to companies that lease assets.

And, whereas Australia introduced the GST economy-wide on the same day, China has staggered the introduction of the VAT both geographically and by industry.

Transportation and logistics were two of the first industries to which the VAT reforms were applied. Nearly all industries are due to implement the VAT reforms by the middle of this year. With the exception of construction, telecommunications and financial services which are due to full under the new system within 12 months.

Before the GST was introduced on July 1, 2000 Australian businesses had 12 months’ notice to prepare their systems and processes. But Wolfers notes that when Shanghai brought in the VAT, businesses were given only six weeks to prepare. The complexity and scale of the VAT reforms mean there will be significant compliance challenges during the transition period that have the potential to be time consuming and costly for corporate finance teams dealing with China. But professional services firms with branches in China are expected to be kept busy working on the reforms.

Flying under the radar

The Australian business community seems to be paying very little attention to the changes. Austrade’s Michael Clifton, a senior trade commissioner based in Shanghai who has regular contact with the Australian business community operating on the ground in China, says he isn’t aware of the VAT reforms being a prominent issue or concern. Nor did it come up as a concern with any of the Australian businesses that trade with China which he met with during a visit to Sydney and Canberra this month.

“It just hasn’t cropped up on the radar at all,“ he says. It is unclear whether this is because the extent of the reforms is not yet well understood, or because Australians experienced doing business with China are acclimatised to the ongoing reform process China is undertaking, he says.

But Austrade has identified an opportunity for Australian businesses with operations in China to restructure to maximise the potential benefits of the reforms.

“In the past companies operating in China have tended look for ways to eschew multiple suppliers to avoid double taxation," Clifton says. One of the most common ways companies have managed this has been to create ancillary business units to perform services, such as packaging or freight, that would otherwise be outsourced to an external supplier.

“The VAT reforms provide an opportunity for companies working in China to asses if they will be able to re-orientate themselves to become more efficient by focusing on their core business," Clifton says.